The chief executive of Canadian Pacific, Fred Green, announced that he would resign from his position as chief executive, president and director. Five other Canadian Pacific directors, including the board’s chairman, John E. Cleghorn, also announced that they would not stand for re-election to the Canadian Pacific board in the face of an activist campaign by William A. Ackman’s Pershing Square Capital. This clears the way for Mr. Ackman’s seven director nominees to be elected at the Canadian Pacific annual meeting on Thursday in Calgary.
It’s a huge victory for Pershing Square, already one of the most prominent of the shareholder activist hedge funds.
To put this in perspective, Mr. Ackman met with Canadian Pacific executives in December to discuss a settlement in lieu of a contest by Pershing Square to replace directors. The details of the discussions held at that meeting remain murky, but it appears that Mr. Ackman asked for two representatives to be placed on the Canadian Pacific board and for Mr. Green to be replaced because of poor performance.
Canadian Pacific offered one board seat and asked for Pershing Square to agree to a standstill.
In an e-mail in January, Mr. Ackman stated that their “border skirmish” could turn into a “nuclear winter.” If his demands were not met, Pershing Square would seek “to replace a greater number of the existing directors.”
Canadian Pacific ignored this statement to its regret. Mr. Ackman will have write large to make additional changes at the $13 billion railroad company.
It is not just a stunning victory for Mr. Ackman, but a blow at what even Canadian commentators called the “clubby” culture at Canadian boards.
Mr. Ackman’s victory could very well spur a change in attitude at Canadian boards generally.
The Canadian Pacific board members may have felt that being part of Canada’s elite would preserve their position, but the market and a number of other factors worked against them.
Ackman Wins Proxy Fight
Mr. Ackman is one of the biggest and best of the shareholder activists. Although his rhetoric was at times overheated, he played his A game by putting forth a solid proposal for change at the company. And it appeared change was needed. In the five years before Pershing Square acquired its stake, the company had a return of negative 18 percent, according to the proxy advisory service Institutional Shareholder Services.
Mr. Ackman also put up an alternative executive to Canadian Pacific in the form of E. Hunter Harrison, who had run Canada’s largest freight railroad, the Canadian National Railway.
Canadian Pacific will now take up the decision of who will run the company. It may be Mr. Harrison, but Mr. Ackman may show flexibility on that choice and the board may pick another person to run the company, but the important thing was for an alternative to be offered.
He also offered choice in the directors that Pershing Square nominated. Pershing Square nominated two nominees from his firm, Mr. Ackman and Paul Hilal, and five independent Canadian directors.
Mr. Ackman greatly benefited from the universal ballot. In the United States, opposing sides normally put up separate ballots that list all of the director nominees for each side. This effectively means that shareholders vote for the entire slate and not individual directors. But Canada allows for all candidates to be put on a single ballot. This allows shareholders to mix and match easily from each side.
Pershing Square used the universal ballot to its advantage, matching each of its director nominees against a Canadian Pacific one.
I.S.S.- the proxy adviser, also adopted this approach in its analysis, matching up the candidates and selecting individual director nominees who were more suited. I.S.S. recommended all of Mr. Ackman’s nominees.
In the United States, there has been a halfhearted push toward use of the universal ballot, including in Mr. Ackman’s failed activist campaign at Target. Pershing Square’s success will make the activists only push harder for Broadridge, the company in charge of proxy distribution services, to make this happen.
This is also a sign that hedge fund shareholder activism against large, capitalized companies not only works but is on the rise. According to Factset Sharkrepellent, 36 percent of all activist campaigns so far this quarter have been against companies with a market capitalization of more than $1 billion.
More than 60% of Canadian Pacific’s shareholders are based in the United States. But by the end of Mr. Ackman’s campaign, it was not just the Americans who went for Pershing Square’s slate; Canadians, including the Ontario Teachers’ Pension Plan, turned to support Ackman.
This is a story of intransigence. Mr. Ackman appeared to have the advantage in February. By fighting him tooth and nail to the end, Canadian Pacific’s board and chief executive have been brought to defeat, something they would have experienced at the ballot box. These directors and the chief executive could have had a much more graceful exit.
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